Page 418 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 16

2.2 Measuring liquidity

Liquidity means having cash, or ready access to cash. Liquid assets are
therefore cash and short-term investments that can be readily sold if the
need arises. In addition, liquidity is improved by unused bank borrowing
facilities.

Liquidity is improved through efficient cash management, and an important element
of good cash management is control over inventory, trade receivables and trade
payables

There are two liquidity ratios that are used to give an indication of a
company’s ability to manage short term financial obligations.

 Current ratio = current assets ÷ current liabilities

 Acid test (Quick ratio) = (current assets – inventories) ÷ current
liabilities

Test your understanding 2

Extracts from B’s master budget for the latest period are as follows:

Statement of profit or loss $000
Revenue 5,440

Gross profit 2,730
Operating profit 900

Statement of financial position
Non-current assets 1,850

Inventory 825
Receivables 710
Bank 50

Current liabilities 780

(a) Calculate the budgeted current ratio.

(b) Calculate the budgeted quick (acid test) ratio.

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